Major Australian Gas exporters seem to be riding high from the beginning of 2018 as compared to last two years at the back of continued demand for LNG following the 2017 trends. LNG consumption was uplifted by about 11.6% in 2017 at the back of the Chinese imports. The improving supply capacity backed by new projects that are expected to receive approvals in 2018 is a good sign. Further, consumption is expected to double by 2030. Leading Energy players that are expected to derive value from the scenario are touched upon herein below -
Woodside Petroleum Ltd (ASX: WPL)
WPL Details
Creating near-term value and growth: Favourable seasonal factors and structural changes in China seem to set a better outlook for LNG in 2018 and WPL seems to be one stock to leverage well from the scenario at the back of the contracts that are due for renewal over 2018-2020 and some level of uncommitted LNG sold. Recently, Mitsubishi UFJ Financial Group Inc. became a substantial holder of Woodside Petroleum while Morgan Stanley ceased to be a substantial holder.
As at September 2017 quarter, WPL delivered a higher revenue than its prior quarter at $914 million with sales volume of 21.1 MMboe. The group also achieved daily, weekly and monthly production at Pluto LNG with a 3% rise (monthly) for July 2017 as compared to July 2016. It also delivered 350th Pluto LNG cargo. Woodside share of NWS pipeline gas and its associated condensate reduced to 16.67%. There were few projects which were undertaken by WPL and are yielding positive results. For instance, Wheatstone commenced its LNG production and will contribute more than 13 MMboe to Woodside’s annual production once it is fully operational. Another project is Greater Enfield and the project remains on budget as scheduled. Persephone, A$1.2 billion project is six months ahead of its schedule. Meanwhile, WPL successfully completed its exploration and appraisal drilling campaign in the offshores of Myanmar. It also executed portfolio LNG sales agreement for delivery of up to 12 cargoes between April 2018 and March 2020. WPL entered into an agreement with ABB Australian Pty Ltd under which a microgrid solution with a lithium-ion Power Store Battery energy storage system will be installed on its Goodwyn A platform in the second half of 2018 which will make WPL to have the first offshore application of such technology in the world. We recommend a “Hold” at the current price $34.57
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WPL Daily Chart (Source: Thomson Reuters)
Oil Search Ltd (ASX: OSH)
OSH Details
Cash flows from PNG LNG: OSH had announced its drilling update for December for P’nyang South2/P’nyang South 2 ST1 and its objective is to migrate 2C gas resource volumes to the 1C category as well as to appraise 2C resource upside, a potential identified in the south-eastern part of the field. During the month, cores were cut through the Toro A and C units and the pressure data was acquired. At the end of December, data acquisition and evaluation over the stand continued and the forward plan is to set 7” liner prior to the drilling which is ahead of additional structural information. OSH has a world class gas portfolio in PNG and also it has a strong resource base. Its strategy is imperative to align the interests for its continuous expansion. It acquired Alaska which brought sustainable development driven by Quality Tier 1 oil resource with a significant upside in development and exploration. It also has a strong balance sheet.
Existing Markets for Contracted LNG Volumes (Source: Company Reports)
It has a strong existing free cash flow generation from producing assets including PNG LNG and operated oil assets. It targets that its dividend policy of 35-50% pay-out is maintained, and its net debt is likely to peak in 2023 with repayment of debts of PNG LNG projects which is likely to be around $0.5 billion pa. Thus, the group aims to focuse on strict capital prioritisation and has surplus cash flows of US$1.1-1.6 billion before any dividends and any other growth initiatives.Oil Search, the biggest local participant in promising LNG expansions in Papua New Guinea, witnessed a stock price rise of 17.15% in the past six months, as at January 04, 2018. We give a “Hold” recommendation on the stock at the current price of $8.01
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OSH Daily Chart (Source: Thomson Reuters)
Liquefied Natural Gas Ltd (ASX: LNG)
LNG Details
Strong market opportunity: LNG is a developer of mid-scale LNG export terminals and a capacity of 16-20 mtpa is under development. All of its regulatory approvals are secured. There are few projects which are undertaken by LNG and include Magnolia LNG Project, at 115-acre leased site in Lake Charles, Louisiana. Another one is Bear Head LNG Project whose Phase I is completed by utilizing OSMR technology and also has excellent relationships with government authorities. It has also got FERC approval which is a well-established process and it ensures safe and reliable facilities. LNG is now in the process of marketing 70 mtpa to the off takers. The group expects LNG to be 50% of globally traded gas in 2035 up from existing 32% level.
LNG group has recently extended the validity period of its current binding engineering, procurement and construction contract with KSJV (a KBB- SKE&C joint venture led by KBR) for its 100% owned subsidiary, Magnolia LNG, LLC and the binding lumpsum turkey contract of EPC US$4.354 is valid through June 30, 2018. The group is positive over the long-term LNG market opportunity given the replacement for coal.
Demand and Supply Fundamentals (Source: Company Reports)
Moreover, LNG is in demand from new markets like China, which is the largest growth market. Korea also indicated about its intention to expand LNG imports. Meanwhile, Magnolia LNG is poised to lead the next round of LNG projects, despite a slight bullish market. The shares of LNG have fallen 17.8% in the last six months (as on January 04, 2018) on the back of volatility and fluctuating commodity prices. On the other hand, management reported that adverse weather conditions in Asia could lead buyers to secure a long-term LNG supply and the group is optimistic in signing offtake agreements with its credit worthy buyers later this year. It has been observed that the prices are recovering as seen in the last week with a rise of 8.24%. The stock was up 7.6% on January 05, 2018 with the buoyancy seen in the sector. We believe that the stock has a room for growth and we recommend a “Buy” at the current price of $0.495
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LNG Daily Chart (Source: Thomson Reuters)
Origin Energy Ltd (ASX: ORG)
ORG Details
Cost reduction by over $500m per annum at APLNG: Origin has exposure in LNG sector through its APLNG project that has continuously maintained production rates above nameplate following the two-train operational test last year. Recently, ORG entered into a new gas sales agreement with AWE along with Cooper Energy at the Casino Henry Joint Venture. Origin Energy will purchase 100% of the joint venture’s production which will be processed under a new agreement with Lochard Energy at the Iona Gas Plant for a matching period. Total production from the field for the financial year to date has averaged approximately 36 terajoules per day. Output is expected to increase following the completion of the work at the Casino-5 well which is scheduled for February 2018. It is also planning for the drilling of a well in 2019 to bring undeveloped gas in the Henry field to the market. ORG aims to have cost reduction by over $500m per annum at APLNG in a span of 18 months and expects cashflow breakeven for APLNG at US$48/boe in FY18.
As far as the stock performance is concerned, the stock prices increased by 35.6% in the past six months and there was a slight increase in the price last week, so by looking at the overall performance we recommend to “hold” the stock at the current price of $9.58
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ORG Daily Chart (Source: Thomson Reuters)
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